United, Continental to form world’s largest airline
United Airlines and Continental Airlines Inc. announced a $3-billion merger on Monday, a marriage that would create the world’s biggest airline.
United parent UAL Corp. is buying Houston-based Continental in an all-stock deal that would put the carrier near the top of all the major domestic travel markets, including Los Angeles, and give it a global reach spanning 59 countries and 370 destinations from South America to Asia and Europe.
If approved by regulators, employee unions and stockholders, the combined company would overtake current No. 1 Delta Air Lines Inc. as the industry’s biggest carrier, with 44 million passengers, 90,000 employees and 10 hubs, the largest based in Houston.
The deal came together after just three weeks of negotiations. But it’s the product of a decade-long search by United Chairman and Chief Executive Glenn F. Tilton. His company for years has been seeking a partner to expand its global network and attract more high-fare business travelers in an industry that has struggled amid a down economy.
United and Continental had flirted with the prospect of a merger twice before, most recently in 2008. But Continental walked away from that deal, expressing uneasiness with United’s financial condition amid a global economic slowdown and rising fuel prices.
But when news of a possible merger between United and U.S. Airways Group Inc. surfaced last month, Continental’s interest was rekindled. Like a remorseful ex-suitor, Continental CEO Jeffery Smisek put in a call into Tilton.
“I recognized that United is the best possible partner for Continental,” Smisek said on a conference call Monday. “I didn’t want him to marry the ugly girl. I wanted him to marry the pretty one, and I’m much prettier.”
The new airline will keep United’s name and headquarters in Chicago. But it will maintain Continental’s colors and logo. Continental’s Smisek will take the helm as chief executive. United shareholders will hold a majority stake at 55%. Tilton will stay on as non-executive chairman.
The airlines said the merger would not result in significant reductions in frontline employees such as pilots and flight attendants. Staff cut-backs will stem from “retirements, attrition and voluntary programs,” according to information posted on a new web site created by the airlines’ management.
Customers’ frequent-flier points won’t be affected, according to the site, and operational changes won’t be made until the end of the year when the deal is expected to be finalized.
United and Continental’s operations largely complement each other in the United States, with few duplicate routes. Still, industry experts said the merger is likely to result in fewer airline seats as the carriers eliminate flights where their routes do overlap. That in turn could result in higher ticket prices for customers while bolstering revenue for a struggling industry. U.S. passenger traffic has dropped 8.2% in the last two years, according to the U.S. Bureau of Transportation Statistics.
United and Continental lost a combined $933 million last year. Smisek is convinced the new entity can turn things around.
“Both carriers are performing better than they have been for the past couple of years,” he said. “The economy is on an upswing. Fuel prices, although high, are manageable.”
But the deal is no sure thing. It needs the approval of federal authorities as well as the companies’ employee unions. United knows this well. In 2000, the carrier struck a $4.3-billion merger agreement with US Airways, only to watch it fall apart amid strong union opposition and antitrust concerns from the Justice Department.
“Regulators get real squeamish about these sorts of deals,” said Tim Beyers, a senior analyst at financial website Motley Fool. “They’ll be keeping a close eye on how much capacity will get cut and how much rates increase.”
This is a particular concern for travelers at LAX, where the new United would leapfrog American Airlines Inc. to become the airport’s largest carrier.
Last year, American carried 8.5 million passengers from LAX accounting for about 15% of the market, according to data from Los Angeles World Airports. United and Continental combined to fly 9.8 million people, which translates to a market share of more than 17%.
United now operates domestically out of terminals Seven and Eight and flies international flights out of Terminal Six — the same terminal that Continental occupies.
“From a facilities standpoint, the merger is made easy by Continental’s terminal being adjacent to United’s with a connector passageway beyond security screening,” said Paul A. Haney, a Los Angeles-based aviation consultant and former LAX airline and airport manager.
At other airports in Southern California there will be little or no effect, he said. Both airlines have relatively small operations at Ontario International Airport and John Wayne Airport with no overlapping routes. Neither serves Long Beach Airport and only United Express serves Burbank Airport.
But the deal could mark the first of more “blockbuster deals” to come, said Tom Captain, principal and vice chairman of the aerospace and defense practice for auditing and consulting firm Deloitte.
“Other airlines will be under pressure to partner up,” he said. “I think we can expect to see a few more of these deals over the next two years.”
